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Should-Read: What Noah Smith does not say is: this is a horrible research program.

Taking your residual, putting it on the right hand side, and calling it a “productivity” shock may allow you to fit some things, but it doesn’t allow you to explain or _understand. And there is no theory and no interest in developing any theory of where these “productivity shocks” come from.

Compare this to medieval Ptolemaic astronomy—well, Judah al-Barceloni had a theory that it was Sammael, the Angel of Mars, who guided the planet around its epicycles.

Ljungqvist and Sargent haven’t even reached that level of Popperian potential falsification: their productivity shocks do not emerge from any economic process whereby businesses learn and forget production technologies, but they simply crystallize out of the air:

…the fact that in classic labor search models of the business cycle, productivity shocks aren’t big enough to generate the kind of employment fluctuations we see in actual business cycles. A number of theorists have proposed resolutions to this puzzle-i.e., ways to get realistic-sized productivity shocks to generate realistic-sized unemployment cycles. Ljungqvist and Sargent look at these and realize that they’re basically all doing the same thing-reducing the value of a job match to the employer, so that small productivity shocks are more easily able to stop the matches from happening…”